Five Critical Mistakes to Avoid When Using Fast Loans
In recent years, lenders offering fast loans, including payday lenders and online lenders making installment loans to borrowers with poor credit, have been under attack. The Consumer Financial Protection Bureau and other agencies have been extremely vocal about the dangers of short-term, high-cost loans. However, these types of loans can be a lifeline for the millions of Americans who use them every year to deal with unexpected expenses or meet financial emergencies. Unfortunately, if borrowers make one of five critical mistakes when using these loans, the outcome can be detrimental to their financial health.
The Five Critical Mistakes Borrowers Need to Avoid When Using Fast Loans
1. Lenders offer a variety of loans that are designed to provide borrowers with quick cash. There are fast loans with bad credit, including payday loans and cash advances. There are installment loans that give borrowers the ability to make fixed monthly payments to retire the loan. The first critical mistake that many borrowers make is to overlook the different types of loans available so that they can select the best type for their situation. Choosing the wrong type can have undesirable consequences. For example, choosing a payday loan when the lower payments involved with an installment loan would be easier on the budget can lead to defaulting on the loan.
2. Before taking fast loans online or through a storefront, borrowers need to consider how they will repay the loan. Even if the loan is to handle a desperate, immediate need, borrowers must have a realistic repayment plan if they want to avoid making a bad situation worse. Whether personal debt involves credit cards, installment loans or payday loans, if more than one-third of a consumer’s net income is required to make payments on debts other than housing, the consumer is considered to be overextended, according to Investopedia.com. Therefore, before applying for any loans, borrowers should review their total payments for other credit debts to see where they stand. They should also add up their total debt repayments, housing costs, living expenses and other outgo to ensure that their income will be sufficient to cover all of their expenses and still make timely payments on the new loan.
3. Lenders charge higher interest rates on all types of loans made to people with impaired credit; the likelihood of borrowers defaulting on the loans increases as credit scores decrease. People who take out fast loans with bad credit often feel that they have little to lose by making payments late or failing to repay the loan. Although it is true that many lenders offering these types of loans do not report timely payments to the credit bureaus, when borrowers default, the lender may choose to transfer the account to a collection agency. The collection agency may report to the credit bureaus, resulting in additional damage to the borrower’s credit rating. Collection accounts typically show up on the borrower’s credit history for seven years, according to Equifax.com. Since negative information does not remain on the credit history permanently, borrowers who are attempting to improve their credit by waiting for negative data to “time out” can undermine their efforts by defaulting on fast loans with bad credit.
4. Perhaps the most damaging mistake that borrowers often make is taking out fast loans online or at storefront lenders when it is not necessary to incur additional debt. Credit is a valuable tool, but it should be used wisely and responsibly. For example, taking out a loan to purchase the latest smartphone when the borrower has a functional phone may not be a wise decision. Borrowing to obtain instant gratification may also be unwise. Many items do not have to be purchased immediately; saving up to pay cash for them later is better than going into debt to buy them today. Borrowers should carefully consider their motives before taking out a loan. It is one thing to borrow money to handle an emergency repair or obtain medical care, but it is quite a different matter to incur a loan to finance a shopping spree or a night on the town.
5. One mistake that is relatively uncommon but which can have serious repercussions is not ensuring that the lender is legitimate. Surprisingly, people sometimes fall for scams that require them to pay a fee in advance if they want to obtain a loan. Another red flag that the lender may actually be a scammer is if a consumer who has never inquired about or applied for a loan receives a phone call from someone offering a deal that sounds too good to be true. For example, the caller might claim that the borrower has already been approved for a loan even though the borrower has no source of income.
Other Mistakes Borrowers Make with Fast Loans
Other mistakes that borrowers make may not be as common or as critical as the first five. However, avoiding these secondary mistakes can help ensure that borrowers receive a favorable outcome from their fast loans.
A relatively common mistake that many borrowers make is to not consider the total cost of the loan. Depending on the type of loan, there may be fees and/or interest. Borrowers need to review their contracts carefully before signing to determine exactly how much the loan will end up costing. The lifetime cost of the loan can also help when comparing loans of different types or from different lenders.
It can also be a mistake to take out fast loans from multiple vendors, especially if the proceeds from new loans are used to make payments on previous loans. This is a bit like taking a cash advance on one credit card to make the monthly payment on a different credit card — debt is simply being reallocated rather than reduced, and it is highly likely that additional fees and interest will be incurred, which will actually increase the total debt load.
Borrowers seeking fast loans with bad credit are sometimes guilty of not knowing their true credit score. Instead, they assume that they will not qualify for any other type of loan. Negative information should be removed by the credit bureau once the statute of limitations has been reached. The time limit varies by the type of debt as well as the state. Consumers are entitled to a free credit report from each of the three main bureaus annually. Monitoring these credit reports can help borrowers find errors and discover ways to improve their scores. Sometimes, borrowers are pleasantly surprised to discover that they qualify for loans that may be less costly than fast loans with bad credit.
Are Fast Loans Online Right for Everyone?
Every borrower’s financial situation is different, so only you can decide whether an online fast loan is the best solution to your problem. By learning all that you can about the various options available, you will be in a better position to make the right choice for your needs. You can find informative articles on fast loans and other financial topics at the Personal Money Store.